Lecherous Democrats Bill Clinton, Anthony Weiner, Bob Filner and Elliott Spitzer have given a whole new meaning to the phrase \u201chands-on management.\u201d\u00a0 But nearly as indefensible is Obama\u2019s desire to name Larry Summers, rather than Janet Yellen, to replace Ben Bernanke as head of the Federal Reserve.\u00a0 If Obama does make that mistake Republicans should denounce it as an egregious example of Wall Street crony capitalism and the \u201cold boy network\u201d picking the best man rather than the best person to fill a crucial post.<\/p>\n
To gain some perspective, consider this hypothetical. Barry is Chairman and CEO of XYZ Corp., and the head of the company\u2019s biggest division, FOMC, is about to retire.\u00a0 Over the past few years, FOMC has successfully grappled with tough industry conditions under the leadership of the Division Head, Ben, and his second in command, Janet.\u00a0 FOMC\u2019s future success depends not only on the smarts of its senior managers but on their collegial cooperation in responding to constantly changing market conditions.\u00a0 Maintaining comity in the ranks is particularly crucial now, because FOMC is about to roll out a new product that has been under development for four years.\u00a0 This is no time to \u201cchange horses in the middle of the stream.\u201d So Janet is the obvious choice to replace Ben. \u00a0But wait.\u00a0 Barry has an associate (and tennis partner), Larry, whom he\u2019d really like to give the job to.\u00a0 Admittedly there are pros and cons.\u00a0 Pros:<\/b>\u00a0 Larry is very smart, and Barry has worked with him before; he will be a team player.\u00a0 Cons:<\/b>\u00a0 Larry has never worked in FOMC\u2019s industry, and he is unfamiliar with FOMC\u2019s distinctive organizational structure and culture of collegiality.\u00a0 Worse still, he is famously abrasive and arrogant, and his inflated regard for his own intelligence has led to imprudent decisions on more than one occasion.<\/p>\n
Whom should Barry select?\u00a0 The answer is obvious.\u00a0 Except to Barry, who really, really wants Larry.\u00a0 Stay tuned.<\/p>\n
Seven Reasons to Be Leery of Larry<\/b><\/p>\n
No Fed Experience<\/b>\u00a0 Although he has ample experience formulating economic policy and addressing economic crises, Summers has never conducted monetary policy. He has never participated in an FOMC meeting, trying to persuade colleagues to follow a cohesive policy, and then communicating that policy in a market-friendly way.\u00a0 Even if he were not notoriously abrasive, Larry would have, at the very least, a challenging transition period. And it would be disastrous if global financial markets sensed there was discord and \u201cbad blood\u201d within the FOMC.\u00a0 Yellen, by contrast, has been at the Fed for many years as a Governor, President of the San Francisco Fed, and Vice Chairwoman. She is widely respected, skilled at building consensus internally and communicating her views to market participants.<\/p>\n
Yet Another Citi Crony Capitalist<\/b>.\u00a0 As I have shown in previous posts, Citigroup has for decades been mismanaged and periodically running to Washington for favors and bailouts (two during the 2008 financial crisis).\u00a0 It skillfully cultivates powerful Beltway Buddies such as Robert Rubin, who after helping dismantle Glass Steagall as Treasury Secretary (making possible the merger of Citi and Travellers) just happened to land a lucrative sinecure at Citi.\u00a0 Now it turns out that Larry Summers has been doing consulting work for Citi; after a stint at the Fed, he could join the bank, just as his mentor Bob Rubin did.\u00a0 With Citi Alum Jack Lew already serving as Treasury Secretary, U.S. macro policy would virtually become a Citi subsidiary.<\/p>\n
A Divisive, Disruptive Confirmation\u00a0\u00a0 <\/b>A third of Senate Democrats and 62 female House Democrats signed letters to Obama supporting Janet Yellen.\u00a0 Given his close ties to Citigroup and to Obama\u2019s failed stimulus plan, nearly all Republicans will oppose Summers. A Democrat operative told The Washington Post, <\/i>\u201cGiven the level of opposition to Larry Summers within our caucus, confirming him would be a huge challenge and probably a pretty ugly process.\u201d<\/p>\n
Tapering Raises the Risks<\/b>\u00a0\u00a0 Putting Larry in charge would be particularly risky now, when the Fed is undertaking the delicate operation of reducing \u201cQuantitative Easing,\u201d or monthly $85 billion purchases of bonds. The mere suggestion of \u201ctapering\u201d these purchases has boosted Treasury bond yields dramatically, in turn driving down the currencies and stock markets of developing nations.<\/p>\n
White House Experience Is Irrelevant:<\/b>\u00a0 Because the Fed is supposed to be totally separate from the White House, Summers\u2019 experience as economic advisor to Obama in 2009 and 2010 is largely irrelevant.\u00a0 Arguably it is negative because it reduces the perceived independence of the Fed.<\/p>\n
Hubristic Imprudence<\/b>\u00a0 Summers is prone to ahistorical analytical hubris leading to imprudent decisions and judgments.\u00a0 At Harvard he reportedly battled the head of Harvard\u2019s endowment, Jack Meyer, because Summers wanted to take the fund\u2019s entire transactional cash balance and invest it in illiquid long-term investments. Bad call.\u00a0 The \u201cCheckbook Fund\u201d lost $1.8 billion in a single year.\u00a0 And Harvard was rocked by a severe liquidity crisis in 2008 when it had to post collateral with Wall Street banks for interest rate swaps, entered into while Summers was President. Harvard literally had to borrow in the middle of a financial panic to meet payroll. Summers also naively underestimated the financial risks created by derivatives, hedge funds, over-levered banks, and skewed incentives for Wall Street executives.\u00a0 Commenting in 2005 on a prescient paper by\u00a0 Raghuram Rajan highlighting these risks, Summers called the paper \u201cslightly luddite.\u201d<\/p>\n
Great Call, Janet<\/b>\u00a0\u00a0 In contrast to Summers, Janet Yellen was quite early in recognizing the huge economic risks posed by sub-prime mortgages. By the Spring of 2007 her staff was already studying the problem. In late June, 2007, she told the FOMC:<\/p>\n
“In terms of the growth outlook, I still feel the presence of a 600-pound gorilla in the room, and that is the housing secto<\/b>r. The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst<\/b>. Indeed, the repercussions of falling house prices are already playing out in some areas where past price rises were especially rapid and subprime lending soared. For example, in the Sacramento metropolitan area east of San Francisco. . . . Research by my staff examining metropolitan areas across the country indicates that the experience of Sacramento reflects a more general pattern.\u00a0 They found that low rates of house price appreciation, and especially house price decelerations, are associated with increases in delinquency rates<\/b> even after controlling for local economic conditions such as employment growth and the unemployment rate. One possible explanation for these findings is that subprime borrowers, especially those with very low equity stakes, have less incentive to keep their mortgages current<\/b> when housing no longer seems an attractive investment, either because prices have decelerated sharply or interest rates have risen. These results highlight the potential risks that rising defaults in subprime could spread to other sectors of the mortgage market and could trigger a vicious cycle<\/b> in which a further deceleration in house prices increases foreclosures, in turn exacerbating downside price movements.<\/p>\n
Copyright Thomas Doerflinger 2013.\u00a0 All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":"
Lecherous Democrats Bill Clinton, Anthony Weiner, Bob Filner and Elliott Spitzer have given a whole new meaning to the phrase \u201chands-on management.\u201d\u00a0 But nearly as indefensible is Obama\u2019s desire to name Larry Summers, rather than Janet Yellen, to replace Ben … Continue reading